Monday 8 March 2021
Every year, history’s greatest investor Warren Buffett writes an annual letter to accompany the Berkshire Hathaway annual report. Last week, Buffett released his 2020 letter. Last year was a tough year for Berkshire, returning 2.4% compared to 18.4% for the S&P 500 index (the risk of not owning tech stocks in 2020…). However, zoom out and Buffett’s performance still massively outpaces the S&P 500 – since 1965 Berkshire has returned an annualised 20% compared to 10.2% for the S&P 500.
In this year’s letter, Buffett discusses a number of points about Berkshire specifically and investing generally. On Berkshire, Buffett acknowledges the underperformance of 2020 and discusses a major mistake he made in 2016 that resulted in an $11 billion write down of the value of one of his businesses in 2020. In the midst of a tough year for the aerospace industry, Berkshire reduced the value at which they held Precision Castparts, an aerospace industry supplier.
Buffett spoke about the ‘Big Four’ in Berkshire’s portfolio – the insurance business, the energy utility business, the railroad business and its 5.4% ownership stake in Apple. For Buffett these are the four ‘jewels in the crown’ and the drivers of most of Berkshire’s returns.
Buffett is always known for a few very quotable lines in his letters and he had another this year. When discussing his strategy of owning great businesses with great management and then leaving them to grow, he wrote:
If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.”